Hold That Rate!
Lock-in a Mortgage Rate Now, Before Rates Increase Further
You may not know where interest rates are headed but if you are in the market for a mortgage, you can protect yourself against further interest rate increases.
Mortgage Rates Are Increasing
The Bank of Canada raised its overnight lending rate to 1.50 percent yesterday (June 1, 2022). Banks and mortgage lenders have responded by announcing that their Prime rates will rise from 3.20 percent to 3.70 percent on June 2. Because the rate on a variable rate mortgage is based on the Prime rate, variable mortgage rates will rise as well. Variable mortgage rates are usually set at a rate of Prime minus a margin.
Fixed mortgage rates are based on interest rates in the bond market. Unexpectedly, interest rates in the bond market also increased yesterday. This rate increase by the Bank of Canada was widely anticipated, but the forceful tone of the announcement appears to have surprised many. The Bank of Canada said, “The risk of elevated inflation becoming entrenched has risen” and “The Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target.” This aggressive tone led to the five-year Government of Canada bond rate increasing 0.13% to 2.87%. Further inflation pressures and aggressive Bank of Canada action could contribute to further increases in the five-year bond rate which would then lead to further increases in five-year mortgage rates.
If you are in the market to buy a new home, you may not be in a rush. House prices are softening and who wants to overpay? If you decide to wait a little longer to buy, be aware that the increasing trend in mortgage rates appears likely you continue. The resulting extra cost of borrowing can offset any benefit you get from a softening housing market. For those of you that are going to be in the market for a mortgage in the next few months now is the time to lock-in a mortgage rate. This will protect you against further increases in mortgage rates while also providing you with time to shop for your dream home.
The two most common ways to lock-in a mortgage rate in Canada are a mortgage rate hold or a mortgage pre-approval.
Mortgage Rate Hold
A mortgage rate hold allows you to get a current mortgage rate that the lender will 'lock-in' for a set period of time. Between 90 and 120 days is the most frequent duration for a lender to keep a rate hold. You are protected if mortgage rates rise during that time period. For instance, if you have a 120-day rate hold today for a fixed rate of 4.69% and you close your mortgage one hundred days from now, that 4.69% rate is your mortgage rate, even if fixed mortgages rates are substantially higher at that time. Note also that if mortgage rates decline you can still take advantage of lower rates in the future.
A rate hold is nice to have for protection if you are looking to buy a home soon, but keep in mind that it does not mean that you are approved for a mortgage. You will not need to provide any documentation at this stage, but your broker or advisor will need to assess your current situation, confirm your identity, run some calculations, and apply to the lender for a rate hold. To eventually proceed with a mortgage after a rate hold you will need to provide documentation that confirms the information you have provided. A rate hold is not a mortgage approval nor is it a legally binding commitment from a lender. You will still have to pass their underwriting scrutiny and qualify for the mortgage.
Mortgage Pre-Approval
You can also lock-in a current mortgage rate with a pre-approval. The process to obtain a pre-approval is similar to the process for obtaining a rate hold.
The key difference is that with a pre-approval the lender provides you with a written confirmation of your pre-approval. This will state your pre-approved mortgage rate as well as the time period for which the rate will be held. Similar to a rate hold, the rate will normally be locked-in for 90 to 120 days. This document shows your realtor that you qualify for financing so that you can go look at houses and even make an offer on your ideal home. A pre-approval gives you credibility with the seller as well and can strengthen your offer.
Even though you get something in writing, it is important to remember that a pre-approval is not a final approval. The lender will need to underwrite the file after receiving all the required documentation and needs to approve the property. A pre-approval is also not a legally binding commitment from the lender. Even if you bid on a property with a pre-approval in place, you should make your offer conditional on financing. Only remove this condition once you have a legally binding commitment from your lender.
Timing Matters
A rate hold can be beneficial if you are just looking for a home and not certain of your timing. If you plan to bid on a house soon, a pre-approval is better because brokers and sellers will view you as a more credible buyer. A pre-approval is the best option for most people, but keep in mind that not all lenders offer pre-approvals.
How Can You Lock-In a Mortgage Rate?
If you are uncertain about the mortgage process, the best thing to do is contact a reputable mortgage broker that can guide you through the process. If you are confident in your situation and understand the process, you can go online and apply simply and easily with an online mortgage broker.
You can do either at Frank Mortgage. We can help customers who want to; 1) talk to a licensed mortgage agent to apply for a rate hold or pre-approval, or 2) fill out an application online and obtain a rate hold or pre-approval without needing to spend much time with an advisor.
Protect yourself against rising rates. Lock-in your mortgage rate today at www.frankmortgage.com.
Don Scott
Don Scott is the founder of a challenger mortgage brokerage that is focused on improving access to mortgages. We can eliminate traditional biases and market restrictions through the use of technology to deliver a mortgage experience focused on the customer. Frankly, getting a mortgage doesn't have to be stressful.
Connect with Don on LinkedIn!